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A detailed note on SaaS Pricing Strategies November 15, 2017

It is a well-known fact that the SaaS domain is currently trending and is predicted to get even bigger and better in the near future. IDC, a pioneer research firm has predicted a steady increase in revenue from the Software-as-a-Service industry over the next four years at least. It says, SaaS industry revenue will surpass $112.8 billion by 2019, at a compound annual growth rate of 18.3%. 

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To be a successful company, you always want increased customer base as well as greater market share. Your sales team can get you both the above goals if you price your product/service appropriately. So, in short, Pricing is the key to success when it comes to SaaS Marketing. Having said that, let us delve deeper into the nuances of SaaS pricing strategies and what are the mistakes that one must avoid in order to effectively price their offering to the audience: 

Significant terms to know in SaaS pricing:

One of the most important terms to know in SaaS pricing is Average Selling Price (ASP). What is this term and how does it impact your business? It is the intersection of Supply and Demand and this term accounts for external parameters like value of each customer along with competitiveness. A small business often ends up messing their pricing strategy by either offering a low (read desperate) selling price in fear of the audience not able to afford their product or high (marvellous) selling price with the confidence that their product will be well-received and affordable by the audience. ASP depends on factors like volume of your deal, cost per customer acquisition etc. Pricing is always inversely proportional to the volume of the deal you seal. To understand this better, let us take an example. Suppose your total revenue is 10,00,000. If your ASP is set to 1000, then you need to acquire 10,000 customers to work the math perfectly. However, if your ASP is 10,000, then you just need 1000 customers to satisfy your requirement. Having a low ASP would mean targeting increased leads, higher conversion rates, increased spends on marketing activities to attract larger audience and so on. However, higher ASP does involve taking bigger risks, but in the end, it would be worth it if you achieve your target of capturing the required customer base. So the whole deal in your SaaS Marketing strategy is perfect pricing. In today's world of Saas it is important to make sure you have enough margin to invest for customer acquisition because end of the day company which can spend the maximum on customer acquisition (and still profitable) wins! 

Different teams to be considered during SaaS pricing:

Your pricing must consider different teams of your company and combine all their thoughts and opinions collectively and constructively. You may want to look at how each of your core teams contributes to Pricing as a whole.

  1. Marketing Team: This team perfectly analyses and understands your brand’s buyer personas and can project exact efforts that would be necessary in order to reach your product or service to the right audience. Which platform would cost how much and what would be the best platform to attract maximum target audience would all be determined by this group of your company.
  2. Sales Team: This is the most important team that ought to be involved in this discussion. They are the people who convert leads into customers and close the sale. They know exactly what a lead expects and how much would it cost to transform that lead into a customer. They are also aware of competitor pricing which plays an important role in maintaining industry standards with respect pricing your product/service.
  3. Product Development Team: These are the people who build your product. They know what and how much does it take to create the product from scratch. It is very important to consider the actual cost that is incurred to build your product and how can it be optimized with minimum resources and efforts. You may also want to consider features and future upgrades while pricing your product. This team can give you variants of your product with additional features that will help you price your offering in different formats for different sections of your audience.
  4. Management: CXOs of the company will have the final say in this discussion after considering feasibility and funding options. 

Approaches in SaaS pricing:

Competitor based pricing, Cost based pricing and Value based pricing are the three types of approaches that your company have to choose from. Let us understand what each one stands for and how can you maximize your profits.

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In Competitor based pricing, as the name suggest, your pricing depends on offerings of other businesses and this may not yield maximum benefits to your brand as you may tend to ignore nuances of your own product. While you may simply take a reference from other peers in your industry, he ultimate decision of how you price your product must be dependent on your business and not on others. 

In Cost based pricing, you take into account internal costs that have been incurred to build your product. You may not necessarily take into consideration, the opinion of your audience. Again, there are flaws in this approach as it involves only a single dimension and neglects the big picture. 

In Value based pricing, you consider more than just one aspect of your company while pricing your product. You take into account the actual value of your offering along with buyer personas and their willingness to pay for your product. This method yields maximum profit and is a customized way to exclusively price your product in the industry. 

Price Intelligently SaaS Pricing Strategy.pdf.png

 Source: http://www.priceintelligently.com/hubfs/Price-Intelligently-SaaS-Pricing-Strategy.pdf 

Excel in SaaS pricing:

Now that it’s clear as to how essential your pricing is for your company to succeed in this utterly competitive world, let us figure out ways to price your product/service in an impeccable manner. We’ve listed a couple of Do’s and Don’ts that you may follow to excel in SaaS pricing. It’s our experience that’s talking. So you may not want to miss out on these. 

1. Free Plans are full of gas and you must trash them soon

In case you’ve placed your product/service at a low cost, then you should opt for the Freemium Model where in you offer a free trial for your offering for a stipulated number of days, post which users have to pay for continuing it, else they lose the subscription. This model refines the quality of your potential leads and customers and acts as a filter for genuine customers. GoAnimate, Dropbox, CrazyEgg are a few brands that use this model and boy, they sure are doing well for themselves! 

2. Long Free Trials are so obsolete. Shorter is smarter

Shorten the duration of your free trial. Generally, 30 days is the usual trend that most companies prefer to follow. While there are a few companies that extend their trial period to 2 or 3 months. Frankly speaking, 30 days are is quite sufficient to explore and figure out the functionalities and features of your product/service/tool. It is a good window to make a decision as to whether the user would like to make that purchase or not. Anything more than that would lower the quality of your brand as it may also suggest low confidence in your offering. GoAnimate is a brand that offers just 14 days as part of its free trial period. Being a video creation tool, it’s quite interesting how users completely exploit the tool in this bracket of 14 days and still choose to purchase the tool because that’s how good it is. It speaks volumes of the confidence that the company has in its tool/product. 

3. Price perfectly

Many companies price their products at a lower price, with a view to attracting more customers. However, this strategy may not always win and to your surprise, often backfires. It is important for you to believe in your product/service and accordingly quote a well-deserved price. Support your pricing with great case studies and testimonials that give your potential leads the confidence to trust in your brand and pay for it. Underpriced products will only attract low quality customers and you’ll have a whole set of hurdles to tackle with such a set.

4. Offer customized pricing plans

Categorize your pricing plans for different types of businesses. You could create separate deals for individuals, startups, small sized firms and enterprises. Try to attract all kinds of companies and play to your strengths. You may also want to have a customized plan for a unique set of audience. This often helps in negotiating with your leads and making a final deal that is mutually beneficial. 

5. Provide payment flexibility with payment options

While pricing your service/product, it is essential to take into consideration, the psyche of your customers. Individuals and startups who may not have huge deep pocketsfunds will want a periodical payment option, maybe similar to monthly instalments. Whereas, a huge enterprise will have the resources to pay up the whole amount for a year at a stretch. So make your plans flexible enough to satisfy small as well as large businesses. all strata of your audience.

6. Never offer Customer Support facility for free

In SaaS marketing, it’s a very common mistake to give away customer support feature for free. Remember, never ever do that. Genuine customers will understand the quality of your product and will be ready to pay a sum for its training. So you do not have to worry about losing clients. In fact, customers will have additional confidence in your offering and sense that it is indeed of great value, which is why it is not available for free. Good things never come for free and you must understand and follow this if you want your brand to succeed in this crazy competitive industry.

Well, that’s more or less all about SaaS pricing and how you must adhere to certain golden rules to see your company climb the ladder quickly. Be smart in making plans and taking crucial decisions for your venture. Stay smart, stay successful!

 

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